Reason #387 to Avoid Financial Advisors

The Dividend Reference community consists of many self-directed investors — those who have decided that they can do a better job of managing their money than a financial advisor. I’m proud to include myself in this group; I fired my advisor long ago, and have been successfully managing my own money for years. 

I have a number of reasons for avoiding financial advisors. For starters, they’re typically way too expensive. I also don’t trust anyone to care more about my money than I do. And in an era of unprecedented information availability, there’s very little they can do to add value that I can’t figure out on my own.

I used to believe that financial advisors are intelligent, ethical professionals — but that they’re simply not something I need.

But I’ve been learning just how naïve that view is. And I recently came across another reminder.

The University of Chicago recently published a mind blowing study that looked into the topic of advisor misconduct. Here are a few of their findings:

1. Most financial advisers who engage in misconduct get to keep their jobs—or are quickly rehired by another firm in the industry;
2. Some of the largest financial advisory firms in the US have the highest rates of misconduct;
3. More than half of misbehaving advisers stay with the same firm after a year; and
4. Of the advisers who have engaged in misconduct, 38 percent are repeat offenders.

Here’s the summary table that really drives home the magnitude of this misconduct:

These numbers are hard to fathom. At some of the largest money managers, almost 20% of advisors have been disciplined for misconduct. They’ve done something unethical — perhaps major, perhaps not — with their clients’ money. Possibly with your money.

I have three big thoughts after looking at this data:

1. This reflects only the advisors who got caught. In an industry where enforcement agencies don’t exactly have a brilliant record of competency, that means the actual frequency of misconduct could be quite a bit higher.
2. The second table is equally frightening to me. It implies that there’s not a single firm with a “zero tolerance” policy towards advisor misconduct.
3. The number of investors impacted by this quickly become very large. There are 1,843 advisors at UBS alone who have records of misconduct. If each of those has 50 clients, nearly 100,000 families are working with reprimanded advisors. Again, that is just at UBS.

If you’re already managing your own money, hopefully this is a nice reminder of why you made that decision. If you are working with an advisor, perhaps it’s a wake-up call. At the very least, do a quick search of your broker and see if anything concerning pops up.

If you are looking to manage your own portfolio, we recently published a report that many Dividend Reference readers have already downloaded. Learn more about The 2016 Premium Guide to the Dividend Aristocrats and The 2016 Premium Guide to the Dividend Achievers.

This article, Reason #387 to Avoid Financial Advisors, first appeared on Dividend Reference.